Gold Forecaster
- Global Watch
Investment reasons for
buying gold Part 2
Julian D.W.
Phillips
Gold Forecaster snippet
Nov 2, 2007
Too much money looking
for a home
Cast you [your]
mind back to previous
currency declines in currencies other than the $, so bad that
the national authorities of those nations believed they needed
intervention to hold up or down exchange rates [Deutschmark -
Pound - Lira etc]. These happened in the early seventies, eighties,
nineties and the noughties we're in now, so this is by no means
new to the currency world. For instance, the Bundesbank repeatedly
had to back off holding the Deutschmark down, as speculators
matched their intervention, in the seventies. Later the Bank
of England paid a very heavy price before it just had to give
in to the attack on Sterling [thanks to George Soros]. Then,
in the Eurozone area, remember the Lira pegs of Europe's Exchange
Rate Mechanism? Well it ain't over yet! Lately we're seeing it
on the Persian Gulf O.P.E.C. states and now in Hong Kong].
But when the going really gets
rough it won't just be the hedge funds reaping a large crop of
profits, but we'll see nations pulling out of currencies and
piling into others. At the extreme, small nations thinking they
suddenly had become the darlings of international investment
will have to build walls to stop the inward and outward flows
of funds far larger than their competence to contain them. Surplus
holders finding it difficult to find a home for their investments
will watch as their values decline. At the same time watch speculators,
aggressive predators of the markets, charging into the herds
of major investors trying to organize changes in their portfolios
in an orderly manner, bring bouts of panic into the currencies
separated from the herd.
Unlike the wild, speculators
will not be sated with one victory, but invigorated and will
go onto the next until the tsunamis of capital waves have run
their course and the weak currency authorities accept their losses
in the form of much lower exchange rates and an obligation to
bring value back to their money. Or will nations let themselves
be infected by inflation and see currencies cheapen as they try
to retain export competitiveness in concert, giving the impression
of continued order? No doubt they will do whatever works for
them in the short-term.
Will the solid Eurozone be
able to withstand the pressures of a strengthening € or
will members such as France and Italy threaten to break ranks,
while Germany smiles under the umbrella of the E.C.B.? Can the
€ contain the member nations howling as their economies
demand different remedies, different interest rate levels and
different protections for their own economic health to the dominant
Eurozone?
Has the global economy been
infected by the ills of the States beyond its own strength?
If only China would let all
this money into there and let the Yuan rise the problem would
be solved, then all could enjoy the profits from a rising Yuan,
but that is precisely what China will prevent, because it then
becomes the victim, stunting its own growth in the process. Jim
Rogers is trying to get in there and quite rightly from an investment
point of view. But why should the Yuan accommodate someone else's
currency mismanagement? Brace yourselves and hide in gold.
Banks, hoping to rebuild
confidence?
The securities that
caused the "Sub-Prime crisis" are still not saleable.
The only way they can be made so is if assets are put into the
packages to completely offset the problem assets and give the
securities real value. Until then, no moneyman in his right mind
will touch them. At best they will go at basement prices or be
put into the hands of hedge funds like Bridge Asset to be re-packaged
as distressed debt and gratefully given some value.
Right now some major banks
are in the process of trying to put together a package aimed
at convincing the banks responsible for this mess and others
involved that these securities [including Special Investment
Vehicles] will have real market value. We don't know yet whether
the sponsoring banks believe this is possible or not, but under
the worried eyes of the U.S. Treasury, faltering efforts are
being made to make it possible. The new entity, called a Master
Liquidity Enhancement Conduit, or M-LEC, could raise as much
as $200 billion or more through the issuance of its own securities,
and use the money to buy securities that otherwise might be dumped
on the market. We find it surprising that bankers should even
attempt to convince other bankers of something they don't believe
themselves and actually put their own money up to do so, but
there it is and we await in awe for the presentation of this
crisis' solution.
Or is no solution on offer?
Are we going to be told that the banks will be there to lend
money to those in distress, while hoping they won't have to?
After all the numbers being put up are so small, relative to
the amounts involved, they can only be there to give an impression
of helping? Simply put, the scheme is a front that they hope
will prevent a fire sale.
Of course if they fail, they
could precipitate a far worse crisis than the one we saw in July
and one that will take a very long time to recover from. Imagine
the sight of disrupted credit market and a Fed desperately trying
to pick up the pieces while not actually saving the investors
themselves. What does the Federal Reserve believe about the crisis?
The Federal Reserve Chairman said recently, "Despite
a few encouraging signs, conditions in mortgage markets remain
difficult... A weak economy, he added, could reinforce problems
in the credit markets".
Not too encouraging, I'm afraid.
The reality is that global
credit markets are in trouble, confirmed now by the first IKB
Deutsche Industriebank AG Structured Investment vehicle, which
has lost about half its value and is unlikely to repay all its
debt. Rhinebridge suffered a "mandatory acceleration event"
after IKB's asset management arm determined the S.I.V. may be
unable to pay back debt coming due, the Dublin-based fund said.
Rhinebridge had $1.2 billion in commercial paper outstanding
as of Oct. 5. Rhinebridge, Cheyne Finance Plc and other S.I.V.'s,
which borrow from the short-term commercial paper market to fund
purchases of asset-backed securities, have struggled as investors
retreated from all but the safest debt. S.I.V.'s have dumped
about $75 billion of assets as a result, prompting U.S. Treasury
Secretary Henry Paulson to organize an $80 billion bank-run fund
to buy some of the securities. In August, Rhinebridge had to
sell $176 million of its assets to cover obligations, and as
much $320 billion of holdings by S.I.V.'s worldwide may be dumped
if the market doesn't improve.
The path forward for credit
markets is not a happy one! Gold is no-one's obligation, so this
is again gold positive.
Capital Inflow Controls
have started
India alone in one
fortnight during the second half of September received inflows
of over $15bn, compared to barely averaging $16bn annually during
2000-2006. Emerging equity markets are up over 440% since 2002
compared to barely doubling in the US and a bit more than doubling
elsewhere in the OECD.
But emerging equities are not
yet overpriced. Emerging nations are good growth stories, particularly
for those oriented towards China. Many emerging nations are creditors
now as growth infuses vast flows of capital to them. No doubt
as the developed world shows a poor performance relative to these
rapidly growing nations, alongside commodities, superior returns
are being achieved.
The excessive amounts of capital,
a consequence of deficit trade financing, [far too much money]
will attempt to squeeze into those markets, taking values beyond
achievable expectations, leaving a empty big drop below prices
should the expectations turn bad. But where the growth does continue
in the nations providing commodities for the major growth nations
such as China, prices will hold at higher levels, as the price
will be in depreciating currencies, such as the U.S. $. Hence,
as with oil, these prices will not be seen as high once the depreciated
value of the currency is brought to bear. But there is such a
huge amount of capital readying itself to move into sound markets,
the dangers of overpricing will have to trigger nations to prevent
asset bubbles from forming with capital inflow controls.
Right now many, many large
institutions are researching the gold market, the commodities
markets and are as keen as ever to go into emerging markets.
Just a tiny portion of the institutional money lying around,
estimated to be just under $200 trillion a massive tsunami of
capital, is in part, about to go walkabout. And if they can get
in, most emerging nations are just not capable of absorbing these
flows. As in South Africa's case where they are getting in the
country can become a fool's paradise believing they have attracted
such capital because they are attractive investment homes. A
dropping interest or exchange rate will soon cure that.
So what can these poor nations
do? As we wrote last week, many will turn to impose Capital Inflow
restrictions. To those who remain unbelievers and think we are
pipe dreaming, please note that recently, the Indian government
recently moved to impose restrictions on non-resident equity
inflows, which led to a sharp correction in the Indian stock
markets and the INR, from which the Indian markets have only
partially recovered. The curbs were thought to [reasonably so,
in view of the Bank of India's objective] keep the Indian Rupee
low against the U.S.$. Since then the Rupee and the Stock markets
have recovered to some extent.
As we have written in last
week's issue we warned that many emerging economies will find
it impossible to continue current policies that attempt simultaneously
to target exchange rates and the pursuit of independent
monetary policy, while allowing the free movement of capital.
This trilemma is just not workable, so be certain that such and
similar measures will spring up in many other countries.
In such a climate gold and
silver have always proved themselves in times when governments
have to intervene to control money directly. This time we will
see it on a broad global front. Gold Forecaster will be providing
a guide to what can happen under Capital and Exchange Controls
and how to cope with them.
Please subscribe to GoldForecaster
for the entire report.
-Julian D.W. Phillips
email: gold-authenticmoney@iafrica.com
321gold Ltd
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